IVA Worldwide Fund Q1 Review: Still Pockets Of Value In JapanVW Staff
The IVA Worldwide Fund Class A (NAV) (“the Fund”) ended the quarter on March 31, 2014 with a return of 2.41% compared to the MSCI All Country World Index (“Index”) return of 1.08%. Since inception on October 1, 2008, on an annualized basis, the Fund returned 11.85% versus the Index return of 8.59% for the same period.
The first quarter of 2014 began with a pullback in equity markets with the MSCI All Country World Index falling -5.7% through February 4. We were able to demonstrate our resiliency in down markets with our portfolio’s return of -2.1% during the same period. Our exposure to cash helped protect the portfolio on the downside and we also benefited from continued strong stock selection, especially in Japan. Our cash exposure rose to 35.3% at quarter-end, up from 31.7% on December 31, while our equity exposure decreased to 51.3% at quarter-end, down from 52.8% on December 31. We trimmed or sold a few equities, some in the consumer discretionary sector and some in Japan, which we believe are close to full valuation. We are comfortable with our cash exposure today given the risks we see in the market and full equity valuations. As long-term investors who attempt to deliver absolute returns to our clients, we will continue waiting patiently for the opportunity to buy securities that we view as undervalued rather than compete on a relative basis over the short-term by buying securities today that we think are fully valued and risk permanent impairment of capital.
IVA Worldwide up 4.9% on strong stock selection
This quarter was marked by strong stock selection as our equities averaged a gain of 4.9% versus the Index1 at 1.1%. Our U.S. stocks added the most to our return, 1.7%, with our equities there averaging a gain of 7.0% versus those in the benchmark at 1.6%. Our performance was led by good returns from a few technology and large-cap energy stocks. Our stocks in France also outperformed and added 0.7% to our return. On a relative basis, good stock picking in Japan benefited us this quarter as it was the worst performing country in the Index. Our Japanese stocks averaged a return of 0.9% versus those in the benchmark at -5.6%. We own a unique portfolio of stocks in Japan, very different from the Index, consisting mostly of cash-rich small and mid-caps, non-exporters, and misunderstood businesses. A number of emerging market stocks were among our worst performers this quarter. Collectively, our stocks in South Korea, China, and Malaysia detracted -0.3% from our return. By sector, in addition to our technology stocks performing well, averaging a gain of 8.6% versus the Index at 1.8%, and contributing 0.8% to our return, our energy stocks also outperformed with average gains of 8.5% versus those in the benchmark at 1.0%. They added 0.6% to our return this quarter, helped by good performance from a top 10 position. Conversely, consumer staples was the only sector to marginally detract from our return, one basis point (0.01%).
Over the quarter, gold bullion bounced back averaging a return of 6.5% and added 0.2% to the Fund’s return. We view gold as a possible hedge against extreme outcomes (deflation, inflation, continued low or negative real interest rates) and believe that a modest allocation is still warranted.
IVA Worldwide gains on corporate bond exposure
We did not find any new opportunities in fixed income this quarter. Our corporate bond exposure (6.7% at quarter-end) averaged a gain of 1.4%, while our sovereign bonds averaged a return of 0.3%. Our sovereign bond exposure fell to 3.6% at quarter-end from 5.7% on December 31. We trimmed exposure to the Singapore dollar government bonds and sold the Hong Kong dollar government bonds. We are concerned about China and devaluation of the Chinese currency, the renminbi, and how that could potentially affect the Hong Kong banking system and ultimately the Hong Kong dollar peg. Therefore, we believed there was more downside than upside in holding the Hong Kong dollar government bonds. As of March 31, 2014, our currency hedges were: 57.1% Japanese yen, 44.5% euro, and 29.3% South Korean won, and together they detracted about -0.1% from our return.
Emerging market stocks have been weak for a while as economic growth in some of those countries has slowed and as some of the currencies have weakened. Over the past year we found a few opportunities within China (through Hong Kong listed equities). For the most part, these position sizes have been small since we expect the Chinese economy to face some difficulties. It is our view that most emerging markets remain bifurcated as many of the companies we view as lower quality (some banks and utilities) have come down a lot in price while what we consider the higher quality businesses (consumer and service oriented, domestic companies) are trading at high valuations. We look for the same attributes in emerging market companies that we do in developed country stocks, such as a strong balance sheet, sustainable earnings power, non-capital intensive, and the ability to exercise pricing power. However, we face a few additional challenges when investing in emerging markets, such as understanding the banking systems, regulations, and the currencies. We also have concerns with the lack of corporate governance and the level of fixed asset investment in China. As a result, we are proceeding cautiously in the region as we look for opportunities that meet our criteria. At quarter-end, our direct emerging market equity exposure totaled 5.4%, primarily through stocks in South Korea, Malaysia, and China (through Hong Kong listed equities). We also own a number of global companies that derive a significant portion of their revenue from emerging markets.
Finding new opportunities is difficult these days, but we see some small pockets of undervalued stocks. In Japan, discounts have narrowed but we believe there are still some under-researched and misunderstood companies there, especially in the small-cap area. In Europe, we are struggling to find new opportunities as many of the companies we view as high quality are expensive. In the U.S., we view equities as fully priced, however, we believe there are still some opportunities in large caps, particularly in the software industry. In conclusion, we see a number of risks in global equity markets today that we are not willing to ignore. These ultra-low, manipulated interest rates cannot stay low forever, corporate profit margins cannot rise forever, and we cannot continue to see pedestrian economic growth alongside demanding equity valuations. We are not willing to be fully invested on the basis that this time is different, and we certainly cannot anticipate when interest rates might rise. As always, we are very focused on individual stock picking, absolute returns, and staying disciplined with our investment approach. 1 The benchmark equity return excludes gold mining stocks.
Past performance does not guarantee future results. The performance data quoted represents past performance and current returns may be lower or higher. Returns shown are net of fees and expenses and assume reinvestment of dividends and other income. The investment return and principal value will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than the original cost. To obtain performance information current to the most recent month-end, please call 1-866-941-4482.
Maximum sales charge for the A shares is 5.00%. C shares include a 1% CDSC Fee for the first year only. The expense ratios for the fund are as follows: 1.27% (A Shares); 2.02% (C Shares); 1.02% (I Shares).
MSCI All Country World Index (Net) is an unmanaged index comprised of 44 country indices comprising 23 developed and 21 emerging market country indices and is calculated with dividends reinvested after de duction of withholding tax. The Index is a trademark of Morgan Stanley Capital International and is not available for direct investment.
The views expressed in this document reflect those of the portfolio manager(s) only through the end of the period as stated on the cover and do not necessarily represent the views of IVA or any other person in the IVA organization. Any such views are subject to change at any time based upon market or other conditions and IVA disclaims any responsibility to update such views. These views may not be relied on as investment advice and, because investment decisions for an IVA fund are based on numerous factors, may not be relied on as an indication of trading intent on behalf of any IVA fund. The securities mentioned are not necessarily hold – ings invested in by the portfolio manager(s) or IVA. References to specific company securities should not be construed as recommendations or investment advice.
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